Bankers have warned that the government’s 50% levy on bonuses threatens an exodus from the City. Are they right, and how might that affect London? Simon Wilson reports.
How much will the bonus levy raise?
£550m was the sum quoted by the Treasury at the time of Alistair Darling’s speech. It seems the government is guessing that, of a projected £3bn bonus pool, £1bn will now not be paid at all, or will be deferred, thanks to the bonus tax, leaving £2bn. A 50% levy on that £2bn raises £1bn. The Treasury then deducts ‘lost’ income-tax receipts on the unpaid or deferred £1bn, leaving it with £550m.
Doesn’t sound too bad.
Sure, but it’s probably too low. The ‘semi-voluntary’ nature of the levy – banks only pay it if they choose to pay big bonuses – means it’s impossible to say exactly how much will be collected. But according to the FT, there was a joke going round the Treasury this week that they may have put the decimal point in the wrong place. Still, the correct sum “won’t be £5.5bn”, said a source, but given the number of banks who appear to be going ahead with big bonuses, “it looks like it will be considerably higher than we thought”. Either way, the government has made very clear that the early cut-off date of 5 April (the PBR suggested the tax only applies to bonuses before that date) should not be abused. Darling’s deputy, Liam Byrne, told MPs, “We remain open to the possibility of extending this legislation and tax if we see the kind of avoidance measures that some have been talking about.”
Is this simply about money?
Far from it. There’s a growing sense that the core issue is the longer-term damage to London’s reputation. This is the chief worry of London Mayor Boris Johnson, who dissents from the official Tory line of support for the government’s measure. Likewise, Bob Diamond, who steered Barclays Capital successfully through the financial crisis, reckons the UK is crazy to implement such a parochial measure. Diamond believes Britain should work with other G20 countries on global standards rather than instituting unilateral one-offs such as the bonus levy, and has been the most vocal senior City figure to warn of an exodus of bankers from London as a result of it.
How many banks have upped sticks so far?
None. And France’s rapid announcement of a similar scheme partially calmed fears of a mass exit. One of London’s largest inter-dealer money brokers, Tullett Prebon, attracted attention this week by offering to help staff who wanted to head off to lower-tax jurisdictions do so. But this looks like little more than posturing. For one thing, Tullett’s offer depends on a whole trading team (of up to 20) all agreeing to move to the same place. For another, brokers such as Tullett Prebon (whose boss is the famously combative City veteran Terry Smith) may be jumping the gun as some industry insiders believe it may not even have to pay the levy.
It’s all a storm in teacup then?
If only. The confusion over whether certain businesses will end up paying this tax is symptomatic of the wider problem faced by the City of London – increased uncertainty and political risk. The same applies to the uncertainty over whether the new tax might be extended, and in what form. That the controversy comes hot on the heels of the row over the bonus supertax should be seen in the context of higher UK income taxes (a top rate of 50% on income over £150,000 from April 2010) and unpopular new EU rules on hedge funds and private-equity houses.
So is an exodus imminent?
Fortunately, London will remain an important financial centre for now, not least because of its location between New York and Asia; the English language; the UK’s political and legal stability; and the fact that wealthy bankers like living in such a cosmopolitan and culturally rich city. But, notes the FT’s Gillian Tett, in a world where global economic power is shifting east, and London’s pre-eminence as a financial centre is likely to decline steadily, it would be naive to think that tax rates will simply be ignored. According to press reports this week, superwealthy financiers and entrepreneurs are leaving the UK at the rate of ten a week. Dozens of hedge funds have decamped to Switzerland in recent months.
Banks are busy figuring out which parts of their operations (ie, mergers and acquisitions) could be shifted to other countries without too much disruption. As Standard Chartered CEO Peter Sands puts it, “whether or not a few bankers leave in the short term is not the point. For more than a quarter of a century…London has attracted internationally mobile businesses thanks to a fair, equitable, stable tax and regulatory regime. That takes a long time to create but it can be eroded very quickly.”
Could this issue end up costing the Treasury?
Short term, the Treasury will get a decent bonus tax windfall. But as Anatole Kaletsky argued in his Times column last week, it is not actually necessary for any big banks to leave London entirely for Britain’s economy and public finances to be seriously damaged. Rather, it “will be sufficient for significant numbers of highly-paid employees” (many of them foreign nationals working on foreign deals) to agree with their firms that they could just as easily do their jobs in Switzerland, Luxembourg or Hong Kong. Banks and financial firms account for a quarter (£11bn) of all corporation tax paid to the UK government, even before the larger sums (tens of billions) raised by their employees in income tax, stamp duty and VAT are factored in. For any country, that’s a lot to put at risk.